Week ahead: It’s all about the Benjamin’s (Bernanke)

After weeks of conjecture about the Fed’s next moves, guess who is in the spotlight this week, ready for his close up? Ben Bernanke and the Federal Reserve Open Market Committee convene a two-day scheduled policy meeting on Tuesday and Wednesday. While there is no expectation of any change to monetary policy (short-term rates should remain at 0-0.25 percent, which is where they have been since December 2008 and the central bank will keep buying $85 billion worth of bonds each month), Fed watchers will parse every word of the accompanying statement; pour over the updated economic forecasts; and listen closely to Bernanke’s subsequent press conference. Investors have been gripped by Fed-fever since Bernanke’s May 22^nd testimony on Capitol Hill, when the Chairman had the temerity to suggest that the central bank could taper its bond buying it the economy were to perk up. Suddenly, it was as if every trader feared what the rest of us have craved for over four years: economic improvement!

While there has been progress (jobs, housing, retail sales), chances are that the Fed will not taper until the September or December meetings. Don’t tell that to bond investors, who are trying to get a jump on the Fed by selling in advance of any announcement. And of course they are right: whether its September, December or early next year, the Fed will determine that the economy is strong enough to go it alone, without the central bank’s intervention.

When the government stops buying bonds and eventually starts to sell them, will it be the death-knell of the bond market? According to Capital Economics, the Fed absorbed 38 percent of the treasury bonds issued between the end of last September (when QE3 was launched) and the end of May 2013. When QE1 and QE2 ended, the damage to the bond market was muted, because anxious investors stepped in and filled the void. This time, there is no European debt crisis to create a “flight to quality” nor is there the belief that the Fed will act again. That said, if the rout in emerging stocks and bonds continues, there could be a uptick in foreign demand for US debt.

The whole idea of the Fed shifting gears is a good thing – it means that the economy is strong enough to go it along and frankly, if the economy can’t absorb higher interest rates, we have bigger problems brewing. In a “normal” economy, the benchmark 10-year yield usually runs close to the pace of economic growth. With most projections showing the economy returning to trend growth of 3 to 3.5 percent in 2014 and 2015, it would stand to reason that the 10-year yield would rise.

Some have been suggesting that the economy can already manage higher rates and that the Fed should get out of the way. Scott Minerd, global chief investment officer at Guggenheim Partners recently noted that Fed buying has badly distorted the bond market and that “The yield on 10-year Treasuries would be roughly 150 basis points higher than it is today” without the Fed’s actions.

“Won’t higher rates kill the housing recovery?” You would think the world had ended when 30-year mortgage rates increased from 3.375 percent to 4 percent, you know where rates were way back in 2011 and early 2012. It’s hard to imagine that 4 percent will stymie the housing recovery, though it may slow down the re-fi market, which has dropped by over 35 percent over the past 6 weeks.

Markets: The first three-day losing streak of 2013 came and went and we survived…and really, it wasn’t all that bad because despite falling in three of the last four weeks and losing 2.5 percent from the recent highs, U.S. stocks remain solidly higher on the year.

• DJIA: 15,070, down 1.2% on week, up 15% on year
• S&P 500: 1626, down 1% on week, up 14.1% on year
• NASDAQ: 3423, down 1.3% on week, up 13.4% on year
• July Crude Oil: $97.85, up 1.9% on week
• August Gold: $1387.60, up 0.3% on week
• AAA Nat'l average price for gallon of regular Gas: $3.62

THE WEEK AHEAD:

Mon 6/17:

G-8 Meeting in Northern Ireland

8:30 Empire State Manufacturing

10:00 Housing Market Index

Tues 6/18:

FOMC Meeting begins

8:30 CPI

8:30 Housing Starts

Weds 6/19:

2:00 FOMC Meeting announcement

2:00 FOMC Forecasts

2:30 Bernanke Press Conference

Thurs 6/20:

Euro zone finance ministers meet

8:30 Weekly Claims

10:00 Existing Home Sales

10:00 Philadelphia Fed Survey

10:00 Leading Indicators

Fri 6/21:

Quadruple Witching: When stock index futures, stock index options, stock options and single stock futures all expire. Because investors must close out of their positions, trading volume and volatility can increase on quadruple witching

Week ahead: Goldilocks jobs report, taper talk recedes (for now)

Not too hot, not too cold…just right. That was the reaction among traders and economists after the release of the May jobs report. The Labor Department said the US economy created 175,000 jobs and the unemployment rate edged up to 7.6 percent. Investors were more hyper-focused on this report than usual, because volatility in global bond and stock markets has spiked in recent weeks. The up and down gyrations were caused by the single most important question of the moment: when will the Federal Reserve pull back on its stimulus programs?

For some time, analysts thought the central bank would not start reducing the amount of bonds it was buying until 2014. Then, during his May 22^nd testimony on Capitol Hill, Chairman Ben Bernanke dropped a bombshell, after being asked whether the Fed might reduce bond purchases before Labor Day. Bernanke said that the Fed could change course “in the next few [FOMC] meetings,” depending on prevailing economic data. Many investors interpreted the comment as a hint that the Fed’s bond buying was coming to an end; and just like that, the highs for stocks and bonds were in and the action tilted towards the downside.

Since May 22^nd, every economic report was viewed as proof that the Fed would taper/not taper. The momentum built up coming into jobs report Friday, when one trader told me “This is THE MOST IMPORTANT JOBS REPORT OF THE PAST 3 YEARS!” OK, maybe that was an overstatement, but there really was a lot of emotional energy spent on this one, perhaps for naught. For all of the consternation, there was a Goldilocks result: not too strong of a report, which may have indicated that the Fed would change its monetary policy sooner rather than later and not too weak to indicate a spring economic swoon.

What did the jobs report tell us? The numbers are consistent with an economy that’s growing, but not at a fast enough pace to generate widespread hiring for the 11.8 million Americans that are out of work. There were good signs even in the seemingly bad news: the unemployment rate increased due to a rise in the workforce.

Of course one report will not put an end to the Fed-watching (navel gazing), but it looks more likely that the central bank will likely wait until the September meeting to discuss a reduction in the $85 billion per month of bond purchases. For now, the taper-talk has receded…you can return to your regularly scheduled programming.

Markets: The jobs report bounce put all three US stock indexes in positive territory for the week.

• DJIA: 15,248, up 0.9% on week, up 16.4% on year
• S&P 500: 1643, up 0.8% on week, up 15.2% on year
• NASDAQ: 3469, up 0.4% on week, up 14.9% on year
• July Crude Oil: $96.03
• August Gold: $1383
• AAA Nat'l average price for gallon of regular Gas: $3.63

THE WEEK AHEAD: It should be a quieter week on the economic calendar. The highlights include retail sales, which are expected to have increased in May and the Producer Price Index, which is likely to show tame inflation at the wholesale level.

Mon 6/10:

Tues 6/11:

Bank of Japan expected to maintain rates; may extend the term of its low-interest fund provision

7:30 Small Business Optimism Index

Weds 6/12:

Thurs 6/13:

8:30 Weekly Claims

8:30 Retail Sales

8:30 Import/Export Prices

10:00 Business Inventories

Fri 6/14:

8:30 Producer Price Index

9:15 Industrial Production

9:55 Consumer Sentiment

Week ahead: What Bernanke should say

Here’s what I wish Ben Bernanke would say to Congress this week: “Stop worrying about inflation and fretting about when we are going to stop buying bonds…instead, start thinking about deflation and why the globe is slowing down.” Let me explain. Despite stock indexes rising to new nominal record highs last week (and being up 23 percent in the past six months without a 5 percent correction,) these days, most of the chatter on trading floors boils down to a simple question: When will the Fed taper its monthly purchase of $85 billion worth of bonds? Some are worried that as the US economy improves, the Fed will remove the punch bowl of easy money, which would likely mean a pause in the stock market rally and an end to the 30-year bull-run for bonds.

That’s why all eyes will be on Federal Reserve Chairman Ben Bernanke, as he testifies before Congressional subcommittees this week about the state of the economy and current Fed policies. It’s expected that Bernanke will reiterate that the central bank plans to pump money into the system at least until the unemployment rate drops to 6.5 percent from its current level of 7.5 percent. But stable employment is only half of the Fed’s dual mandate: it is also supposed to maintain stable prices.

Over the past 30 years, price stability has generally meant that the Fed would use its toolkit to fight inflation, but with tame readings on prices across most of the globe, the world's central bankers might have to confront new enemies: deflation (falling prices) and disinflation (slowing of price increases).

It would be great if during his testimony, Bernanke underscored that the biggest problem facing the economy is weak demand and falling prices, not runaway inflation. For all of the hand wringing over the Fed’s “money-printing” policies, there is no evidence of inflation. The Consumer Price Index (CPI)  fell to a 2 ½-year low of 1.1 percent year-over-year and core inflation, which removes the volatile energy and food categories, tumbled to a 22-month low of 1.7 percent, below the 2 percent level that the Federal Reserve targets.

What does this all mean? With prices falling, manufacturing slowing and unemployment still high, it’s hard to see why the Fed would alter its current policy. That may mean that the stock market has room to run, especially as investors who have pooh-poohed the rally, now scramble to pile in. A good old fashioned melt-up is occurring before our very eyes!

Markets: With new nominal highs for the Dow and the S&P 500, you might have forgotten about two social media IPO anniversaries. Facebook went public on 5/18/12 and one year hence, the stock is down 31 percent. There was a bit more to celebrate at LinkedIn, where 2-years after its IPO (5/19/11), the stock us up 96 percent.

• DJIA: 15,354, up 1.6% on week, up 17.2% on year
• S&P 500: 1667, up 2% on week, up 16.9% on year (up 1,000 points or 150% since 3/09)
• NASDAQ: 3499, up 1.8% on week, up 15.9% on year
• June Crude Oil: $96.29, up .01% on week
• June Gold: $1364.70, down 5% on week (down 18.5% year to date)
• AAA Nat'l average price for gallon of regular Gas: $3.64

THE WEEK AHEAD:

Mon 5/20:

8:30 Chicago Fed National Activity

Tues 5/21:

Weds 5/22:

10:00 Existing Home Sales

10:00 Ben Bernanke to testify on US economy before Congressional subcommittees

2:00 Fed minutes released

Thurs 5/23:

8:30 Weekly Claims

9:00 FHFA Home Price Index

10:00 New Home Sales

Fri 5/24:

8:30 Durable Goods Orders